Rescuing Miners Helps Pinera as Chile Eyes Mine Tax

Sept. 29 (Bloomberg) -- Chilean President Sebastian Pinera
is gaining popularity from his efforts to free 33 trapped copper
miners as he asks lawmakers to limit tax increases on companies
such as BHP Billiton Ltd. and Xstrata Plc.

Pinera, who won praise from political opponents to miners’
wives for his handling of the miners’ rescue, is taking
advantage of a 10 percentage-point climb in popularity to revive
plans for a maximum 9 percent tax on operating profits. His
original proposal was blocked in July by the opposition, which
argues the country should take as much as 18 percent of
companies’ earnings.

The Harvard-trained economist and former Lan Airlines SA
controller is seeking $1 billion from tax increases over three
years to help finance reconstruction after an 8.8-magnitude
earthquake. While seeking to satisfy demands that miners pay
more in taxes, Pinera is working to ensure companies complete an
estimated $50 billion of mine expansions within the next decade.

“He’s trying to use his political capital,” said Patricio
Navia, a specialist in Chilean politics at New York University.
“Pinera put the mining royalty on the table. He needs to close
that, otherwise it will become a campaign issue in 2013.”

The government’s response to the Aug. 5 cave-in that
blocked access to the San Jose copper and gold mine and trapped
workers underground helped reverse Pinera’s sagging approval
ratings and made Mining Minister Laurence Golborne the most
popular member of his cabinet, according to a Sept. 1 poll.
Pinera’s approval rating is 56 percent, compared with 46 percent
before the mine rescue attempts. Golborne stands at 78 percent.

Member of the trapped miners’ families cheered and shouted
“Viva Chile” this week when they were told one of the three
drill rigs working on the rescue had reached roughly the half-way point, according to images on national television.

Meeting

The Senate may start deliberations on the mining tax as
early as this week. Golborne is scheduled to meet with members
of the Senate finance committee in northern Chile today to
discuss the legislation, the ministry’s press office said in an
e-mailed statement.

“Pinera has conducted himself very well; he’s been here
with us,” said Maria Cortes as she sat in a tent in Chile’s
Atacama desert near the mine site, waiting for news about her
brother-in-law and the 32 other miners trapped almost half a
mile underground. “They can’t raise the taxes on the small
independent miners, but for the big companies -- yes.”

Congress rejected Pinera’s first attempt to raise the
mining royalty in July. He submitted a revised bill on Aug. 31.

Sliding Tax

The legislation, which was passed by the lower house on
Sept. 15, calls for charging metals producers a sliding tax of 4
percent to 9 percent on operating profits through 2012, compared
with the current 4 percent fixed rate now. Companies that are
exempt from tax increases through 2017 under current contracts
will have the choice to adopt the new system now in exchange for
an extension of that tax exemption until 2025.

Opposition lawmakers have called for a tax of as much as 18
percent and oppose extending the exemption. In Chile, only the
president can introduce legislation to change taxes.

A heavier tax burden may prompt some companies to scale
back investments that may total about $50 billion over the
coming decade, said Javier Cox, chief executive officer of
Chile’s Mining Council, which represents Anglo American Plc,
Xstrata, Antofagasta Plc and other miners in Chile.

“There isn’t room to keep raising them indefinitely,” he
said in a telephone interview from Santiago.

Shrinking Economy

Chile, Latin America’s fifth-biggest economy, shrank for
the first time in more than a decade last year and is set to
grow by its fastest pace in five years in 2010 at 5 percent to
5.5 percent, the central bank said in its latest monetary policy
report. President Pinera wants economic growth to average 6
percent during his four-year administration, about double that
of predecessor Michelle Bachelet. The mining industry accounted
for almost 7 percent of gross domestic product last year,
according to central bank data.

Pinera’s proposal would increase total mining taxes to as
much as 44 percent from 39 percent, Libertad & Desarrollo said
in a Sept. 17 report. That compares with 45 percent in Arizona,
40 percent in Canada’s Quebec province and 34 percent in New
South Wales, Australia, the Santiago-based research group said.

“It could make the companies rethink the timeframe for
expanding some of these operations,” Tony Rizzuto, a managing
director of investment bank Dahlman Rose & Co. in New York, said
in a telephone interview.

Even with the ratings jump, Pinera’s proposals will be
difficult to pass in the Senate, where the Concertacion
opposition group holds a majority, said Carlos Huneeus,
executive director of Santiago-based Center for the Study of
Contemporary Reality, an independent polling group.

‘Same Fate’

The proposal “is basically the same that was presented and
rejected not so long ago,” opposition Senator Ricardo Lagos
said in a statement on his website. “It will suffer the same
fate.”

BHP spokeswoman Carolina Lucaroni declined to comment.

“Xstrata Copper is closely following the government’s
modified mining royalty as it progresses through the Senate and
will decide whether to accept the modifications if and after
legislators approve the final version,” spokeswoman Emily
Russell said Sept. 22 in an e-mailed response to questions.

In Australia, mining companies reached an agreement with
Prime Minister Julia Gillard on a new minerals resources rent
tax, which included concessions they had sought. This ended a
dispute that cost her predecessor Kevin Rudd his job. The new
tax, if passed in parliament, is due to start in 2012.

‘National Priority’

Golborne called on the opposition to approve the plan while
speaking to students in Rancagua, Chile on Sept. 27. Of the $1
billion that the tax increase would generate in three years,
$600 million would go toward the reconstruction effort and the
rest would be spent in provincial areas, he said.

“This is an area of national priority,” Golborne said in
an interview. “The industry is going through an extraordinary
economic cycle, and they can give more.”

Chile’s Senate is made up of 19 members of the opposing
coalition, 16 pro-government senators and three senators who are
independents or members of outside parties. The government needs
a majority to achieve approval of the bill, which would go to a
joint committee if it is turned down or changed in the Senate.

“The government is strong and with favorable ratings,
which means the opposition is relatively weak as a result,”
Robert Funk, deputy director of the University of Chile’s public
affairs institute, said in a Sept. 9 interview from Santiago.
“It’s possible the government has calculated that there’s a
window of opportunity to introduce changes to mining taxes and
spend a little capital.”

Since Pinera took power, the spread on the country’s five-year credit-default swaps rose to 76 basis points on Sept. 27
from 74 basis points, according to CMA Datavision. The credit-default swaps market ranks Chile as the 15th-strongest borrower
in the world, behind the U.S. and U.K. and ahead of France.

Chile’s IPSA Index, which tracks the country’s 40 most
traded companies, has risen 33 percent so far this year.